The Economy

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The Economy What you didn’t want to know Where it is Where it isn’t Where it might go Where it might not go Why? Why not?

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The Economy. What you didn’t want to know Where it is Where it isn’t Where it might go Where it might not go Why? Why not? are you blue enough?. Some people who majored in economics:. Gerald Ford Ronald Regan George Bush, Sr. Sandra Day O’Connor Arnold Schwarzenegger - PowerPoint PPT Presentation

Transcript of The Economy

The EconomyWhat you didn’t want to know

Where it is

Where it isn’t

Where it might go

Where it might not go

Why?

Why not?are you blue enough?

Some people who majored in economics:

Gerald Ford

Ronald Regan

George Bush, Sr.

Sandra Day O’Connor

Arnold Schwarzenegger

Mick Jagger

Tiger Woods

Some people who majored in economics:

after economicsbefore economics

What is Economics?Economics:

is NOT always what you think

is NOT Rocket Science

will NOT tell you how to get rich

Economics is the only field in which two people can receive a Nobel Prize for saying exactly the opposite thing.

What is Economics?Economics:

The First Law of Economics:  For every economist, there exists an equal and opposite economist.

The Second Law of Economics:  They're both wrong.

Economics is the painful elaboration of the obvious.

Economics is common sense made difficult.

What IS economics?

What is Economics?Economics is:about people and the choices they make.

(Gwarthey & Stroup, Economics: Private and Public Choice, 4th Ed., 1987, p. 4.)

the study of almost everything humans must do as they attempt to live their lives. (Carson & Thomas, The American Economy - Contemporary Problems and Analysis, 1993, p. 4)

the study of the use of limited productive resources in a society to satisfy the unlimited desires of its members. (Hyman, Microeconomics, 3rd Ed., p. 9)

the study of individuals’ behavior and the resulting effects on the allocation of scarce resources. (Barron & Lynch, Economics, 3rd Ed., 1993, p. 4)

focuses on all the choices people make as well as the personal and social consequences of their choices. (Byrns & Stone, Economics 5th Ed., 1992, p. 4.)

Economics is:the study of how scarce resources are allocated among

competing uses. (Ragan & Thomas, Principles of Economics, 1993, p. 6)

the study of individuals’ behavior in a world of scarcity. (Barron & Lynch, Economics, 3rd Ed., 1993, p. 4)

an inquiry into the nature and causes of the wealth of nations. (Adam Smith,1776)

the academic discipline most discussed by the general public. It is also one of the least understood. (Ramsey, Economic Forecasting - Models or Markets, 1977, p. 11)

the science of wealth. (Murad, Economics - Principles and Problems, 1963, p. 3.)

Economics is:the study of the economy

(Collander, Economics, 1993, p. 6)

what economists do. (Quoted by Becker, Economic Theory, p. 1.)

the idea of economizing. (Albrecht, Economics 3rd Ed. p. 7.)

the study of constrained maximization. (Bowden, Principles of Economics, 4th Ed. 1983, p.1.)

the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. As such, economics is the study of how people make choices. (Miller, economics today - the micro view, 2006, p. 3)

Things are not always what they seem

• Everything has a price

• There is a cost to everything

• Actions have consequences

• Frédéric Bastiat (1801-1850)

• That Which is Seen, and That Which is Not Seen

Basic EconomicsScarcity is:

Limited Resources & Unlimited Wants

Our wants exceed our ability to satisfy

Resources of production are insufficient to satisfy all of our wants

Must make choices

Basic EconomicsLimited Resources & Unlimited Wants

Scarcity

Choices

Opportunity Cost

Basic EconomicsOpportunity Cost =

The value of your next best alternative, not taken.

Whatever you give up to do something.

Whenever you choose, you lose!

Where would you be if you weren’t here right now?

Basic EconomicsBasic assumptions:

People are rational.

Never intentionally do anything that would make themselves worse off.

People act in their own self interest.

The economy is the way that society chooses to answer the three questions:

What (to produce)

How (to produce it)

Who (who gets it)

What is the economy?

What is inflation?Blue Pill Answer:

A sustained rise in the average level of prices

Price index: CPI; PPI; PCE

Red Pill Answer:

An artificial increase in the money supplyInflation is always and everywhere a

monetary phenomenon (Milton Friedman)

1) Destroys the purchasing power of money

2) Redistributes income & wealth

3) Hurts lenders

4) Helps borrowers

5) Hurts workers

6) Helps business owners

7) Hurts those on fixed incomesOnly government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless. (Milton Friedman)

Effects of inflation

Nominal versus Real values:

Nominal = named, or market value

Real = purchasing power

Real = (Nominal / price index) x 100

Effects of inflation

Nominal wage = $10 per hour

Price level (CPI) = 100

Real wage = $10 per hour

Hamburgers are $1

Each hour of work = 10 hamburgers

Effects of inflation

Inflation!Inflation!Price level (CPI)= 120

Hamburgers = $1.20

Nominal wage = $10 per hourReal wage = $8.33 per hour ($10/120)x 100

Each hour of work = 8 hamburgersIt now takes $12 to buy what used to cost $10

Effects of inflation

Historical purchasing power of US dollar thru 2004 (American Institute for Economic Research)

I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments. (Friedrich August von Hayek)

Inflation is repudiation. (Calvin Coolidge)

Inflation is always and everywhere a monetary phenomenon (Milton Friedman)

Inflation

What is Unemployment?Blue Pill Answer:

Fraction of the labor force not employedPopulation- under 16- institutionalized- don’t want to work= Labor force

Labor force = employed + unemployed

Unemployment rate = (U / LF) x 100

What is Unemployment?Types of unemployment

Seasonal

Frictional = 3%

Structural = 2%

Cyclical = 0%

Full employment = 5% unemployment

Natural Rate of Unemployment

What is Unemployment?

What is Unemployment?

What is Unemployment?

Problems with measurement:

Underemployed?

Discouraged Workers?

Home production?

Underground economy?

What is GDP?Gross Domestic Product is

The total market value

of all

final

goods and services

produced

within national borders

in one year

2009 U.S GDP = $14,730,200,000,000 RELEASED AT 8:30 A.M. EDT, FRIDAY, OCTOBER 29, 2010 (BEA.gov)

What is GDP?Nominal GDP = $14,730,200,000,000

Real GDP = $13,260,700,000,000

Price Index = 1.11

What is GDP?Consumption $10,376,700,000,000Spending by households on goods & servicesMost stable70.5%

Investment $ 1,896,100,000,000Spending by business on capital goodsBusiness inventory adjustmentMost volatile13%

Government $ 3,018,900,000,000Spending on goods and services20.5%

Exports $ 1,842,100,000,000Spending by ROW on U.S. goods & services12.5%

ImportsSpending on ROW by U.S. $ 2,403,500,000,00016.5%

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&FirstYear=2009&LastYear=2010&Freq=Qtr

What is GDP?

1998 2001 2004 2007 2010 2011

8,793.5 10,286.2 (17%) 11,867.8 (15.4%) 14,061.8 (18.4%) 14,730.2 (4.8%) 15,087.7 (2.4%)

C 5,918.5 67.31% 7,148.8 69.50% 8,285.1 69.81% 9,806.3 69.74% 10,376.7 70.45% 10,722.6 71.07%

I 1,510.8 17.18% 1,661.9 16.16% 1,968.6 16.59% 2,295.2 16.32% 1,896.1 12.87% 1,913.6 12.68%

G 1,526.1 17.35% 1,846.4 17.95% 2,232.8 18.81% 2,674.2 19.02% 3,018.9 20.49% 3,029.7 20.08%

X 953.9 10.85% 1,027.7 9.99% 1,180.2 9.94% 1,661.7 11.82% 1,842.1 12.51% 2,087.6 13.84%

M 1,115.7 12.69% 1,398.7 13.60% 1,798.9 15.16% 2,375.7 16.89% 2,403.5 16.32% 2,665.8 17.67%

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1998&LastYear=2010&3Place=N&Update=Update&JavaBox=no#Mid

What is GDP?Country GDP (PPP)European Union $14,890,000,000,000United States $14,720,000,000,000China $ 9,872,000,000,000Japan $ 4,338,000,000,000India $ 4,046,000,000,000Germany $ 2,951,000,000,000Russia $ 2,229,000,000,000Brazil $ 2,194,000,000,000United Kingdom $ 2,189,000,000,000France $ 2,160,000,000,000Italy $ 1,782,000,000,000Mexico $ 1,560,000,000,000South Korea $ 1,467,000,000,000Spain $ 1,375,000,000,000Canada $ 1,335,000,000,000Indonesia $ 1,033,000,000,000Turkey $ 958,300,000,000

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html

What is GDP?Country GDP (PPP)Lebanon (87) $58,650,000,000Bill Gates $53,000,000,000Costa Rica $51,300,000,000Bolivia $47,980,000,000Uruguay $47,800,000,000Warren Buffett $47,000,000,000El Salvador $43,980,000,000Panama $43,480,000,000Luxembourg $40,810,000,000North Korea $40,000,000,000Cambodia $29,400,000,000Afghanistan $28,900,000,000Christie Walton $22,000,000,000Madagascar $20,730,000,000104 more countries

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html

What is GDP?

Problems:

No household production

No “underground” production

No black market production

Only indicates production not living standard

Six basic economic models(tools of analysis)

Cost = Benefit

Production Possibilities Frontier

Circular Flow

Supply and Demand

Business Cycle

Aggregate Supply and Aggregate Demand

Cost = Benefit model

Marginal!

If MB > MC?

If MB < MC?

Economic Decision Rule

Self Interest

Never intentionally do something that will make you worse off.

Production Possibilities Curve (Frontier)

1) The PPC models scarcity.

2) The PPC models trade-offs.

3) The PPC models Opportunity Cost.

4) The PPC models the Law of Increasing Opportunity Cost.

5) The PPC models efficiency.

6) The PPC models full employment:

Basic EconomicsLimited Resources:LandLaborCapitalEntrepreneurship ?Technology ??Economics is the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. As such, economics is the study of how people make choices. (Miller, economics today - the micro view, 2006, p. 3)

Production Possibilities Curve (Frontier)

Production Possibilities Curve (Frontier)

Production Possibilities Curve (Frontier)

Given: LandLaborCapitalEntrepreneurshipTechnology

• Unattainable

•Attainable but inefficient

X

Y

X1

Y1

Production Possibilities Curve (Frontier)

1) The PPC models scarcity.

2) The PPC models trade-offs.

3) The PPC models Opportunity Cost.

4) The PPC models the Law of Increasing Opportunity Cost.

5) The PPC models efficiency.

6) The PPC models full employment:

Say’s LawJean Baptiste Say (1767–1832)

“It is worth while to remark, that a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value.   When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands.  Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable.  But the only way of getting rid of money is in the purchase of some product or other.  Thus the mere circumstance of creation of one product immediately opens a vent for other products.” (J. B. Say; 1803: p.138-9)

"products are paid for with products" (J.B. Say; 1803: p.153)

"supply creates its own demand.” (J.S. Mill)

The act of production creates income sufficient to purchase what was produced.

or: Income equals expenditure equals the value of productionor: Y = AE = GDP

Say’s Law & the

Circular Flow Model

HouseholdsBusinessFirms Land

LaborCapitalEntrepreneurship

Resource Market

Goods & Services Market

Say’s LawJean Baptiste Say (1767–1832)

"products are paid for with products" (J.B. Say; 1803: p.153)

"supply creates its own demand.” (J.S. Mill)

The act of production creates income sufficient to purchase what was produced.

or: Income equals expenditure equals the value of productionor: Y = AE = GDP

“The Law of Markets”

Supply and DemandRequires markets

Demand: What you are willing and able to buy.

Supply: What producers are willing and able to bring to the market.

Teach a parrot to say, “Supply and demand”, and you have an economist.

Supply and Demand (Demand)

Health Care

(Doctor Visits)

Price (per visit)

Quantity (No. of visits)

Supply and Demand (Demand)

Health Care

(Doctor Visits)

Price (per visit)

Quantity (No. of visits)

$500 0

Supply and Demand (Demand)

Health Care

(Doctor Visits)

Price (per visit)

Quantity (No. of visits)

$500 0

$400 1

Supply and Demand (Demand)

Health Care

(Doctor Visits)

Price (per visit)

Quantity (No. of visits)

$500 0

$400 1

$300 2

$200 4

$100 5

$50 10

Supply and Demand (Demand)Health Care

(Doctor Visits)

Price(per visit)

Quantity(No. of visits)

$500 0

$400 1

$300 2

$200 3

$100 5

$50 10

Demand for Health Care

$0

$100

$200

$300

$400

$500

0 1 2 3 5 10

No. of Doctor Visits

Price

D=MB

Supply and Demand (Supply)

Health Care

(Patients Seen)

Price (per visit)

Quantity (No. of visits)

Supply and Demand (Supply)

Health Care

(Patients Seen)

Price (per visit)

Quantity (No. of visits)

$0 0

Supply and Demand (Supply)

Health Care

(Patients Seen)

Price (per visit)

Quantity (No. of visits)

$0 0

$50 1

Supply and Demand (Supply)

Health Care

(Patients Seen)

Price (per visit)

Quantity (No. of visits)

$0 0

$50 1

$100 2

$200 3

$300 4

$400 5

$0

$100

$200

$300

$400

$500

0 1 2 3 4 5

Pric

e

No. of Paitents Seen

Supply of Health Care

Supply and Demand (Supply)Health Care

(Patients Seen)

Price (per

visit)

Quantity (No. of visits)

$0 0

$50 1

$100 2

$200 3

$300 4

$400 5

S = MC

Supply and DemandHealth Care

$0

$100

$200

$300

$400

$500

0 1 2 4 8 16

No. of Paitent - Doctor Visits

Pri

ce

S = MC

D=MB

Supply and Demand

Supply and Demand

Supply and Demand

What is the Business Cycle?Fluctuations of Real GDP around its long-run trend.

What is the Business Cycle?Fluctuations of Real GDP around its long-run trend.

What is the Business Cycle?Fluctuations of Real GDP around its long-run trend.

BUSINESS CYCLE REFERENCE DATES DURATION IN MONTHS

Peak Trough Contraction Expansion Cycle

Quarterly datesare in parentheses

Peak to

Trough

Previous trough to

this peak

Trough from Previous Trough

Peak from Previous

Peak

May 1907(II)January 1910(I)January 1913(I)August 1918(III)January 1920(I)May 1923(II)October 1926(III)August 1929(III)May 1937(II)February 1945(I)November 1948(IV)July 1953(II)August 1957(III)April 1960(II)December 1969(IV)November 1973(IV)January 1980(I)July 1981(III)July 1990(III)March 2001(I)December 2007 (IV)

Average, all cycles:

1919-1945 (6 cycles)

1945-2009 (11 cycle)

June 1908 (II)January 1912 (IV)December 1914 (IV)March 1919 (I)July 1921 (III)July 1924 (III)November 1927 (IV)March 1933 (I)June 1938 (II)October 1945 (IV)October 1949 (IV)May 1954 (II)April 1958 (II)February 1961 (I)November 1970 (IV)March 1975 (I)July 1980 (III)November 1982 (IV)March 1991(I)November 2001 (IV)June 2009 (II)

1324237

18141343138

11108

1011166

1688

18

18

11

3319124410222721508037453924

10636581292

12073

35

59

4643355128364064638848554734

117526428

10012891

53

73

5632366717404134939345564932

116477418

10812881

53

66

What is the Business Cycle?Measured as change in rate of growth

7/90-3/91 (8 mo.)

3/91-3/01 (120 mo.)

3/01-11/01 (8 mo.)

11/01-12/07 (73 mo.)

12/07-6/09 (18 mo.)

What is the Business Cycle?Measured as change in rate of growth

What is the Business Cycle?Measured as change in rate of growth

http://www.tradingeconomics.com/Billing/Analytics.aspx?Source=ForecastButtonInChart

What is the Business Cycle?Measured as change in rate of growthReal gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.1 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, and nonresidential fixed investment . . .

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.1 percent in the fourth quarter, the same increase as in the second estimate; this index increased 0.7 percent in the third quarter.

Real final sales of domestic product -- GDP less change in private inventories -- increased 6.7 percent in the fourth quarter, compared with an increase of 0.9 percent in the third.Published: 3/25/2011TradingEconomics.com, US Bureau of Economic Analysis 

http://www.tradingeconomics.com/united-states/gdp-growth